Gross Domestic Product

Nominal GDP and Real GDP

The Indian economy expanded 7.3% in the year ended March, in line
with the initial forecast and marginally higher than 6.9% recorded in
the previous year.
How is this growth rate calculated?
Example
Good or
Services

2011
P

Apples

40

T-Shirts

90

Bicycles

80

Mobiles

70

2013

2012
Q

60

60

10

150

170

100

90

110

110

100

120

80

130

80

180

Gross Domestic Product

GDP is the Market Value of all Final Goods and Services Produced on
Domestic Soil During a Given Time Period
Market Value
Final
Produced
Domestic Soil
Given Time Period

GDP measurement
Orange Inc Transactions
Wages paid to Orange Inc
Employees
Rent paid for land
Oranges sold to public
Oranges sold to Juice Inc
Juice Inc Transactions
Wages paid to Juice Inc
Employees
Interest paid on capital used
Oranges purchased from
Orange Inc
Revenue received from sale
of orange juice

$15000
$5000
$10000
$25000
$10000
$2000
$25000
$40000

Expenditure Method (expenses by final users)=10k+40k=50k

Value Added:
Value Added by Orange Inc: (25k+10k)=35k
Value added by Juice Inc: (40k-25k)=15k
Total:
50k

Income Method:
Wages: 15k+10k=25k
Interest:
2k
Rent:
5k
Profits: 15k+3k= 18k
Total:
50k

Using GDP calculation methods for a Bread

Economy
Let us consider this bread economy:
The bread economy, which has Farmer, Miller, Baker, Consumers.
The farmer grows wheat and sells it to the miller at Rs. 500. Assume
that he incurs no cost for intermediate goods. Though there is a
labour cost of Rs. 100.
The miller buys the wheat at Rs. 500 and turns it into flour. He incurs
a labour cost of Rs. 50. He sells flour to the baker at Rs. 700.
The baker buys the flour and employs labour at a cost of Rs. 100 to
make it into a bread which he sells to the consumer at Rs. 1000.

GDP measurement
Stage of
Production

Sales
Receipts

(1)

(2)

Cost of
Intermediate
goods

Value Added Labor Cost

(4)

(5)

Factor
Incomes
(6)

(3)
Farmer:
Wheat

500

Miller: Flour

700

500

100

W=100
P=400

500

200

50

W=50
P=150

Baker: Bread

1000

700

300

100

W=100
P=200

Expenditure method/Final Demand (GDP at market price: GDPmp)=

Sales Receipt from Bread=1000.
Value added method (GDPmp)=500+200+300=1000
Income method (GDPfc)=W+P=250+750=1000
Expenditure method=valued added method=Income Method

GDP vs GNP
Country and
Location

Resident
Status

Geography

Factor
Income

Count in Indias GDP

Count in Indias GNP

Infosys in US

Resident

US

300

No

Yes

IBM In India

NonResident

India

500

Yes

No

If Indias GDP is 1000, what would be Indias GNP?

GNP=1000+300-500=800

GNP=GDP+ Net factor income from abroad (NFIA)

GDP=GNP-NFIA
NFIA: factor incomes earned by our residents from the rest of the world minus factor incomes
earned by non-residents from our country.

Is there any difference between GDP/GNP at

market price and GDP/GNP at factor cost?
GDP/GNP measured at factor cost is obtained when we measure
GDP/GNP using Income method- Remember!
Lets say there is only one final product in the economy, whose
market price is Rs.100 and has an excise duty of Rs.20.
GDP at market price is 100, but GDP at factor cost is 80

GDPfc=GDPmp- (net indirect taxes)

GNPfc=GNPmp- (net indirect taxes)

What is Gross about Gross Domestic Product?

Suppose Rs.100 crores worth of investment goods (say machines and
tools) are added in the current year, but Rs. 25 crores of investment
goods have been used up in the production of currents years output.

While calculating GDP we add 100 crores.

If we add 75 crores, what we will be calculating is Net Domestic
Procuct.
GDP- depreciation= Net Domestic Product (NDP)
GNP- depreciation= Net Domestic Product (NNP)

From GDP to National Income

National Income: factor incomes earned by the residents of a country
Step 1: Convert GDP to GNP
GNP=GDP+NFIA
Step 2: Convert GNP at market prices (GNPmp) to GNP at factor cost
(GNPfc)
GNPfc = GNPmp - Net indirect taxes
Step 3: Convert GNPfc to NNPfc
NNPfc= GNPfc depreciation
National Income (NI)is NNPfc